I am a partner of Riser Adkisson LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas. My practice is in the area of creditor-debtor law, and I am the author of books on asset protection and captive insurance. I have been an expert witness to the U.S. Senate Finance Committee, and am very active in the American Bar Association, and currently am the Chair of the Committee on Captive Insurance. I was also the collection attorney for the $20+ million judgment by the San Francisco Bay Guardian against the holding company of the Village Voice chain. I am serving as an American Bar Association adviser to the Uniform Law Commission's revisions of the Uniform Fraudulent Transfer Act and the new Series of Unimcorporated Business Entities Act.

In the middle of litigation that was starting to look unfavorable, the Debtor went to Attorney who set the Debtor up in an offshore asset protection trust a/k/a a foreign asset protection trust (“FAPT”) in the Cook Islands. Rosen charged the Debtor $45,000 in fees and costs to set up the FAPT.

The Debtor then transferred $400,000 into the FAPT. But soon thereafter, the Debtor had a change of heart and repatriated $325,000 back to Florida which was used to pay down the mortgages on her home. The Debtor then — admittedly out of fear of contempt — closed down the FAPT and brought back the rest of the money.

The Debtor’s fears about the outcome of the litigation proved to be well-founded, and a $2.9 million judgment was entered against her in the U.S. District Court for the Southern District of Florida. The Debtor then filed for bankruptcy protection.

The Bankruptcy Trustee sued Attorney and his law firm to recover the $45,000 and alleged that the money paid by the debtor to Rosen was a fraudulent transfer under 11 U.S.C. sec. 548, and also amounted to malpractice and unjust enrichment by Attorney.

The U.S. Bankruptcy Court then held a bench trial. The Trustee put on only one witness — the Debtor — and no expert witness on the malpractice claim.

For her part, the Debtor testified that she was insolvent at the time of the transfers, but she was impeached with an Affidavit of Solvency whereby she had sworn otherwise under oath. This was successful, as the Bankruptcy Judge commented:

While, I never found any evidence about legal malpractice, I’m looking for what could possibly be argued as unjust enrichment. As to the constructive fraud, fraudulent transfer, the Court thinks it’s abundantly clear that there’s been no establishment of insolvency.

In fact, the record is abundant with records of solvency. The witness signed a solvency affidavit, which she said she did not read, but the Court notes—noted that the witness could remember some things in the way of financial numbers of a rather complicated structure down to the penny, and other things, she couldn’t remember at all.

But aside from that, it’s the opinion of the Court that the plaintiff’s case is woefully lacking in any proof on any of the counts, and, therefore, the motion to dismiss should be granted.

On appeal from the bankruptcy court to the U.S. District Court, the District Judge agreed that the Bankruptcy Trustee’s evidence to support his claims was “woefully lacking”, and the appeal at that level was denied. The Bankruptcy Trustee then took the matter up to the Eleventh Circuit, who also found that the Bankruptcy Trustee utterly failed in proving his case, holding simply:

The bankruptcy court heard the Debtor’s testimony and discredited it. This is entirely within its province. * * * Further, the record supported a finding that the Debtor was solvent at the time of the transfer so that the bankruptcy court was entitled to make such a finding.

And with that, Attorney was able to keep his attorney fees and costs.

ANALYSIS

This is one of the very few asset protection cases to have directly considered the so-called Affidavit of Solvency that is so frequently used by planners. As such, it is a very important opinion.

The effectiveness of Affidavits of Solvency has long been disputed. Some would say that such Affidavits are self-serving hearsay, and as such will be likely be inadmissible or not given much weight by the courts. Others would retort that at the very least such Affidavits can be an effective memorial of the assets and liabilities that a debtor had at the time that planning was implemented, and might be admissible under the past recollection recorded exception to the hearsay rule.

That debate will have to continue, since this case did not involve the debtor trying to use the Affidavit of Solvency in her defense.

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